Japan

Please see attached our <i>Third Quarter Strategy Outlook<i/> which discusses the major investment themes and views we see playing out for the rest of the year.

Brexit is putting our bearish short-term dollar view in question as global policy uncertainty has surged. Yet, investors are displaying elevated signs of risk aversion but the global economy still looks fine. This dissonance is likely to end with investors increasing risk taking, a bearish development for the counter-cyclical dollar. Favor commodity currencies over European ones.

Dear Client, After being ardent bond bulls for many years, it is time to shift gears. As I write these words, the U.S. 10-year Treasury yield has hit an all-time low of 1.37%, the 10-year bund yield is at -0.18%, and the 10-year Swiss yield is at -0.61%. While we do not expect yields to soar anytime soon, the long-term risk for yields is now more to the upside than the downside. This suggests that investors should sell bonds on any rallies. We are maintaining a neutral stance towards global equities for now, but will be looking to overweight stocks later this year if (as we expect) the post-Brexit shock running through policy circles leads to a further easing in fiscal and monetary policy. With this in mind, we are opening a new structural trade recommendation: Short an equally-weighted portfolio of Japanese, German, and Swiss 10-year bonds. We regard these three negative-yielding markets as among the most overpriced in the world. Details will follow later this week in our Q3 Strategy Outlook. Best regards, Peter Berezin, Managing Editor

The model continues to keep its largest overweight in U.S. equities. Directionally, Japan's underweight is slightly reduced for a second month (albeit by only 13 basis points).

For the month of June, the model performed in line with both global equities and the S&P 500. For the month of July, the model is increasing its risk exposure.

Global uncertainty is elevated, but markets know this. Brexit could prove extremely negative for the global economy if it prompts a questioning of the EU's integrity. The cyclical outlook for the pound remains poor, but a short-term opportunity to buy GBP/JPY has emerged. We still like the SEK and commodity currencies. The SNB will continue to intervene, but the peg is increasingly dangerous.

The Russo-Chinese relationship got a diplomatic boost this week, but can China provide Russia with the capital it needs to boost productivity meaningfully?

Government bond yields will remain at depressed levels as investors stay in safe haven assets given the lack of clarity on the next steps in the Brexit saga.

Among the myriad of troubling signs for the global economy, some developments on the inventory and deflationary fronts could point to a brighter future. While still not our base case, those factors need to be monitored. With Brexit over and done with, we are reshuffling our GBP portfolio. Remain bullish EUR/USD. Go short CAD/NOK.

The Brexit vote is a coin toss. We introduce a simple model to estimate the effect of a "stay" or a "leave" vote on various currencies and assets. A "leave" vote could cause GBP/USD to fall to 1.32 or less, creating a tactical buying opportunity. Extreme GBP implied volatility suggests that selling vol is attractive. The Fed decreased its rate projections.